With merger, HP adopts Fiorina's strategy 8 years later

COMMENTARY8 years later, HP does it Fiorina's way

Published 5:30 am, Wednesday, May 14, 2008

As chief executive of Hewlett-Packard eight years ago, she proposed buying a computer services company to bolster HP's position in a critical market. Shareholders balked, driving down the shares, which prompted Fiorina to abandon the bid.

On Tuesday, HP said it plans to pay almost
$14 billion for a computer services company, Plano-based Electronic Data Systems.

Regardless of the turmoil she brought to HP, the bid for EDS shows yet again that she had the right strategy.

After years of rebuilding, of returning to dominance in the personal computing market, of restoring financial performance, of sorting through boardroom battles and scandals and post-merger bitterness, HP is back where it started.

Fiorina had wanted to buy PricewaterhouseCooper's consulting business for about $18 billion. When that didn't work, she turned her sights on Houston's Compaq Computer Corp., paying about $19 billion for it in 2002.

Thus began the twilight of Fiorina's tenure at the top.

HP's need to bulk up in services, however, never disappeared.

Under Fiorina's successor, Mark Hurd, HP rallied to trounce Dell in personal computers, but PCs are still a commodity business.

The big money resides in the big iron — servers, storage and networking gear. Selling those complex machines, though, requires more than just a sales force. It requires consultants who can advise companies on how to best configure equipment and networks.

It also means maintenance and tech support contracts that turn every hardware sale into a revenue stream.

And so the legacy of Bill Hewlett and Dave Packard, the fathers of Silicon Valley, joins that of Dallas billionaire Ross Perot, who created the market for computer services in 1962.

Sold to GM

For EDS, it's an unceremonious end.

Perot sold EDS to General Motors in 1984, and the company hasn't been the same since. Spun off from the automaker in the 1990s, it has struggled to find consistent profits despite winning multibillion-dollar contracts. A series of executives has failed to recapture the Perot legacy.

Last year, sales grew at about half the rate of the previous year, and the company has faced mounting competition from foreign rivals. As of Friday, before reports of HP's offer surfaced, its shares had fallen 37 percent since April 2007.

As part of HP, EDS is in for some big changes. EDS prided itself on being "vendor agnostic," meaning it would recommend whatever machines suited customers' needs. Now it will be shilling for HP.

IBM the common foe

For both HP and EDS, a union makes some sense. For years, they've had a common enemy: IBM. Big Blue has retreated from the PC market, but it remains a force in servers. As for services, EDS surrendered its dominance in the market it created to IBM more than a decade ago and hasn't been able to win it back.

The current bid for EDS is smarter than Fiorina's overpriced run at PwC. She was buying a fringe player at the top of the market. Two years later, IBM — them again — snapped it up for less than $4 billion.

Hurd's getting a better price for an industry stalwart, but at $25 a share, HP shareholders seem to think he's still overpaying. The stock fell 5 percent to $44.27 Tuesday.

Hurd is walking a precarious path. One cause for worry: EDS is less profitable. In the last quarter, its gross margin, or profit after operating expenses, was 14 percent, compared with 24 percent at HP.

Hurd's gambit, though, is less about short-term profitability and more about market share and growth going forward.

Independent culture

The challenge is making it work. That can be said of most mergers, but EDS' fiercely independent culture could be a problem. Its executives, whose offices in its fortresslike headquarters were once known as the "god pod," aren't the subservient type. Other attempts to combine EDS — with MCI, British Telecom, Sprint — fell through because of culture clash, because EDS insisted on being in charge.

Time has taught both EDS and HP that this path may be inevitable, the only hope for either of them to challenge their Big Blue nemesis. IBM, by the way, probably isn't worried.